equality growth

Equal countries grow faster, says OECD

I recently mentioned how the IMF and the World Bank had begun to talk about inequality, part of a growing recognition that too much inequality is bad for society and the economy. To the list we can now add the OECD, who released a striking new report this week.

Noting that in-country inequality has risen in 16 out of 21 member states studied, the OECD has chosen to look specifically at the links between inequality and economic growth. “Reducing income inequality would boost economic growth” they assert. “This work finds that countries where income inequality is decreasing grow faster than those with rising inequality.”

Contrary to the regular arguments against action on inequality, their research found “no evidence that redistributive policies, such as taxes and social benefits, harm economic growth, provided these policies are well designed, targeted and implemented.”

This will not be a surprise to those who have been campaigning for a more equal society. (Neither is it a surprise them that among the many benefits of equality, it’s the connection to economic growth that has got the OECD on board.) But there are some nuances to the research that campaigners will want to consider carefully, as it’s got its own angle. Specifically, much of the writing on inequality focuses on the runaway gains to the richest in society, the now infamous 1%. While this aspect of inequality matters for other reasons, the bit that impacts economic growth most is the gap between the middle and the bottom.

The reason that inequality holds back economic growth is to do with education and social mobility, the report argues. Higher inequality lowers educational opportunities for those on the lowest 40% of incomes. If your parents are on a low income, you have a much lower chance of going to university and completing a degree, and thus fewer opportunities for well-paid employment.

Working across generations, the impact of inequality is cumulative. The OECD have calculated how much more growth countries could have had if they had been more equal. The results should give pause for thought, especially when you look at Mexico on the far right below. Did rising inequality basically eat two decades of Mexico’s economic growth?

growth-and-inequality

If you want all the evidence and the maths behind these conclusions, it’s all there to explore in the report, or there’s a shorter summary if you prefer.

The OECD have shown how reducing inequality could lead to higher economic growth. That’s one of many reasons why inequality matters, and from a postgrowth perspective certainly not the most important, but in our growth-obsessed economy it may be a trump card. Just as it was Lord Stern and his economics that put climate change on the political agenda, perhaps it is the economics of inequality that will finally capture our politicians’ attention.

3 comments

  1. Well – now what does “re-distribution” do? It transfers a little income from the haves to the have-nots. And what do the have-nots do with their newly found “wealth”? They certainly don’t invest it in the stock market or buy obligations or fill their savings accounts. They are likely to pay off their debts (or might not even slip into debt – which is bad news for the banks) and – they spend it. Perhaps on fresh quality food rather than cheap processed food. No matter what it is: those at the lower income end, even in the richest countries, would not be likely too save re-distributed benefits. They spend it. Which happens to be, very directly, good for the (real!) economy, the one that employs people, makes things etc. It is in fact big capital that “costs” society. Not social benefits. There is a balance of course, somewhere. It is a dynamic system with maxima and minima in terms of total benefit, but currently the situation is heavily skewed towards big capital. But, admittedly, it is an ideological view. Shall we benefit the majority or a few rich? Perhaps, like some people seem to believe, it is the divine right of the rich to be rich? I believe, and that indeed is a believe, that we should strive for a society where there is enough freedom to benefit big time from exceptional achievements, and yet where nobody is left behind. Where everyone, no matter what, can live a decent life, where compassion carries more weight than compulsive – and ultimately pointless – capital accumulation. The “winner takes it all” ideal is deeply inhumane, especially considering that it is fake, as the game is mathematically rigged at its roots. It’s all about math and morals. The first can be used to rig the system – and to expose the system. Actually both already happened. The second is our decision. Sorry for always becoming fundamental… it’s just that I think we do have to look at the roots to, ultimately, assure not only a decent society, but our planetary survival. Unfortunately I’m not very optimistic lately.

    1. “a society where there is enough freedom to benefit big time from exceptional achievements, and yet where nobody is left behind” – that’s a good articulation of what we need.

      Unfortunately most of the big money isn’t in exceptional achievements, but as you say, in holding capital. Our celebration of entrepreneurs hides the fact that it’s far easier to make money by having a lot of money already, whether or not you create anything new or add any ‘real’ value to society.

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